This paper analyzes tax competition when welfare maximizing jurisdictions levy source-based corporate taxes and multinational enterprises choose tax-efficient capital-to-debt ratios. Under separate accounting, multinationals shift debt from low-tax to high-tax countries. The Nash equilibrium of the tax competition game is characterized by underprovision of publicly provided goods. Under formula apportionment, the country-specific capital-to-debt ratio of a multinational's affiliate is independent of the jurisdiction's tax rate. Public good provision is either too large or too small. If the formula is predominately based on capital shares and if there is a positive debt externality there is clearly underprovision under formula apportionment.
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Paper provided by Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) in its series MAGKS Papers on Economics with number
200934.
Find related papers by JEL classification: H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
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